On Friday morning, the Bureau of Economic Analysis reported that household disposable income (personal income after taxes) fell 0.1% in April after rising in March. The fall in household consumption was even larger (0.2%), again after rising in March. The response of the U.S. stock market was immediate. Both the Dow Jones Industrial Average and the S&P 500 closed down 1.4% with the Dow falling 209 points.

Some economists have been hoping that consumer spending will drive an economic recovery, perhaps due to rising stock prices and rising home values. They were brought back to reality by these statistics. Households can only increase consumer spending over the long-term if their incomes are rising, and those incomes are not rising. It is becoming evident that economic stagnation will continue with real GDP growth staying at about the 1.8% rate that the U.S. economy experienced from the first quarter of 2012 to the first quarter of 2013.

A real recovery is going to require an increase in the rate of business investment spending and/or a reduction in the trade deficit. And neither of them are likely to improve much so long as the United States retains the highest corporate income tax rate in the world and continues to let trade cheaters keep our trade out of balance.

Former Reagan speechwriter Pat Buchanan has a solution: abolish the U.S. corporate income tax and replace it with a 10% tariff. In his May 31 column (Abolish the Corporate Income Tax!), he points out that corporate income tax revenue has declined to 10% of tax revenues, despite the U.S. having, by far, the highest corporate income tax rate in the world. He points to all of the following benefits of eliminating that tax altogether:...

Pres. Obama succeeded in getting the Congress to increase the progressivity of the federal personal income tax by raising the top marginal rate from 35 to 39.6 percent and increasing the rate on dividends and capital gains from 15 percent to 20 percent for taxable incomes over $400,000 for single filers.

The Congressional Budget Office (CBO) published an analysis of the progressivity of the personal income tax and of all federal taxes. Its summary includes the following paragraph:

"In 2007, the bottom quintile’s average rate for the individual income tax was -6.8 percent, which means that refundable earned income and child tax credits exceeded the income tax owed by that group. On average, households in the second quintile also received more in credits than they paid in individual income taxes. The average income tax rate was 3.3 percent for the middle quintile and 6.2 percent for the fourth quintile. For the highest quintile, the rate was 14.4 percent. The top 1 percent, on average, paid 19.0 percent of their income in individual income taxes."

So the personal income tax average rates range from -6.8 percent in the lowest quintile to 19.0 percent for the highest one percent. Raising the marginal rates in the top brackets will increase the progressivity of the tax system very little, but will have the wrong economic incentives. And taking government expenditures into account is already very progressive. ...

The scandalous misuse of the power of the IRS bureaucracy requires more than legislation requiring political neutrality in its administration. The personal and corporate income tax codes have increased in size and complexity enormously. The size of the bureaucracy and the costs of administering the personal and corporate income taxes are beyond belief. The costs to taxpayers to comply with the law runs into hundreds of billions of dollars. The current income tax laws, both personal and corporate have to be repealed and replaced.

Prof. Arthur Laffer and his colleagues at The Laffer Center calculated the economic burden caused by the tax code’s complexity in April, 2011. They estimated the total cost of administering the personal and corporate income tax, which yielded about $1.4 billion in 2008, to be $431.1 billion, or 30 percent of total income tax revenue. They break the cost down as follows:

$31.5 billion in direct cash outlays by taxpayers,

$12.4 billion IRS administrative costs (employing 2010 data), and

$377.9 billion the value of the time spend by taxpayers in collecting and filing their returns.

Thirty percent for administration and compliance costs is outrageous; even ten percent for just cash outlays is excessive. The cost of ad ministering sales taxes is on the order of two percent which is one of the reasons given by many economists for recommending substituting the Fair Tax for the personal income tax. ...

The recent scandal involving the IRS illustrates the out-of-control growth of the federal bureaucracy. Instead of limited powers of the federal government and reservation of all powers to the states not specifically granted to the federal government, spelled out in the Bill of Rights, the first 10 amendments to the U.S. Constitution, the reverse now is true.

The states are not only dependent fiscally on the federal government but it is they who have limited powers. It's the powers of the IRS that should be limited and the predominance of the states must be reasserted.

Watch the following video from the May 18 Huckabee Show if you want to understand how the IRS scandal could eventually hurt our economy:

And if you want to understand where this behavior comes from, read this May 17 commentary from the Chicago Tribune by John Kass (IRS scandal a reminder of how I learned about The Chicago Way). Kass reminisces about family discussions within his large Greek-American family growing up in Chicago. Here is a selection from this engaging commentary about why his family members enjoyed talking about politics but were afraid to engage in political activities:...

The recent scandal involving the IRS illustrates the out-of-control growth of the federal bureaucracy. Instead of limited powers of the federal government and reservation of all powers to the states not specifically granted to the federal government, spelled out in the first ten amendments to the U.S. Constitution, the reverse is now true. The states are not only dependent fiscally on the federal government but it is they who have limited powers. In this paper, we propose to limit the powers of the IRS and reassert the predominance of the States.

The IRS would, under our proposal, administer only an income tax on wages and salaries. Since most wages and salaries are taxed at the source, corporations and other employers will pay over to the IRS nearly all of the wage taxes collected. Recipients will have only a simple return to file, dealing mostly with allowances for dependents. Most will have to file no return at all. The billions now spent by the IRS in administering a tax code of many thousands of pages will be reduced 95 percent.

Taxes on interest, capital gains and corporate income would be replaced by a form of tax on wealth, a tax on the capitalized value of all business enterprises. Given the total value of business enterprises, a very small rate of perhaps 3 percent, together with the tax on wages and salaries, would yield more than the current yield of the personal and corporate income taxes. ...

The weekly report of actual initial unemployment insurance claims for the week ending April 27, coupled with the decrease during the previous week, showed that 298,692 claims were filed. A showing under 300,000 is consistent with a mild recovery; 250,000 would indicate a fairly strong recovery.

But the administration cannot claim credit. The boom in the natural-gas-from-shale industry, a private-sector phenomenon opposed by the administration's Environmental Protection Agency, is responsible. Serendipity is once again saving the American people from Washington's foolish economic policies.

David Stockman’s background made him uniquely qualified to write this insightful analysis of the follies committed by politicians, economists, investors, and business leaders over the past half century. He graduated as a history major at Michigan State, did graduate work at Harvard in 1968-70, served in the House of Representatives from 1977 until his resignation in 1981 to join the Reagan Administration and served as Director of the Office of Management and Budget until his resignation in 1985. He spent the decades since then working first for Salomon Brothers and left to create his own investment fund, and headed an auto parts firm that went bankrupt in 2005. Paul Krugman, commenting on the book, called him “a cranky old man”. Unlike Stockman, Krugman does not worry about the deficit, believing it is manageable whereas Stockman believes that “the fiscal cliff is permanent and insurmountable. “It stands at the edge of a $20 trillion abyss of deficits over the next decade.” He writes that it is now “Sundown in America: the end of free markets and democracy.”

Stockman is right that we are close to the end of free markets and democracy. How did we arrive at this point? Who was responsible? What brought us to this point? This book is an attempt to answer those questions. ...

The weekly report of actual initial unemployment insurance claims for the week ending April 27, 2013, coupled with the decrease during the previous week, showed that 298,692 claims were filed. A showing under 300,000 is consistent with a mild recovery; 250,00 would be more desirable. But the administration cannot claim credit. The boom in the natural-gas-from- shale industry, a private sector phenomenon opposed by the administration’s Environmental Protection Agency, is responsible. Serendipity has once again saved the American people from Washington’s idiotic policies.

The federal government has run budget deficits amounting to many trillions of dollars and the Federal Reserve has printed money like mad but it has hardly been enough to make a dent in our massive unemployment. It has barely accommodated new entrants to the labor force and has been so ineffective that involuntary unemployment is still 15 percent not the 7 percent the Department of Labor has been reporting because it does not count as unemployed people no longer looking for work.

The Keynesian policies pursued by the administration have been ineffective. Pres. Obama’s 2009 $800 billion economic stimulus ran out of stimulus as soon as the spending stopped. There was no Keynesian multiplier. And the massive annual government budget deficits had no Keynesian multiplier. ...

[An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

Journal of Economic Literature:

[Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

Atlantic Economic Journal:

In Trading Away Our Future Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]